Finance Bill 2016 – Changes to Property Fund Taxation

On 20 October 2016, the Irish Minister for Finance published draft legislation amending the tax treatment of regulated Irish funds which invest in Irish property. The legislation imposes a 20% withholding tax on distributions and redemptions from Irish property funds.

Scope of Changes

The changes are highly targeted. They are intended to apply to Irish Qualifying Investor Alternative Investment Funds (QIAIFs) which have invested in Irish real estate and related assets. The funds within the scope of the proposal include ICAVs, unit trusts and investment limited partnerships. UCITS funds are not within the scope of the proposals. The proposals do not impact internationally focused Irish regulated funds which remain exempt from Irish taxation. However, for the relatively small number of Irish funds involved, the changes will require careful consideration as the legislation develops over coming weeks.

Summary of Changes

The draft legislation proposes a new tax regime for Irish funds holding Irish real estate (to be referred to as an Irish Real Estate Fund or "IREF"). The key features of the regime can be summarised as follows:

IREFs are Irish regulated funds which derive at least 25% of their value from Irish real estate assets. In an umbrella fund, each sub-fund is considered to be a separate entity and the 25% threshold is applied to each sub-fund.

Funds carrying on a property rental business, property development or trading in Irish land are within the scope of the proposals. The holding of unlisted shares or securities which derive their value from Irish land are also affected.

Where an IREF makes an actual distribution or redeems units held by non-resident investors, it will impose a withholding tax of 20%.

If a fund disposes of land which it has held for at least five years, no withholding tax will apply to redemptions utilising those disposal proceeds.

No withholding tax will be applied where the payments / redemptions are made to an Irish pension fund, another regulated Irish fund or a life assurance fund and their EU equivalents.

The new regime will apply to accounting periods beginning on or after 1 January 2017. The first tax returns relating to the 2017 financial year shall be due by 30 January 2018.

Legislative Timetable

The current proposals will be reviewed and further amendments and clarifications may be introduced before the legislation is enacted into law. Enactment is expected by mid-December 2016.

Conclusion

The proposed changes will materially alter the tax treatment of Irish property funds. Investors may wish to restructure their Irish real estate holdings in order to utilise standard corporate structures, or alternatively, to develop a Real Estate Investment Trust (REIT).